What is Probate and How do I Avoid it?

How Do You Avoid Probate?

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Fortunately, with proper advance planning, probate can be readily avoided. Several methods of asset transfer and titling can remove an individual’s property from the probate estate. Typically, a combination of these methods can be implemented to prepare a plan that (a) meets the needs of the individual, (b) addresses other goals and intentions of their family legacy and (c) wholly avoids probate administration. The following represent the major methods of probate avoidance:

1. Trust Formation

By forming a revocable living trust or a testamentary trust, the transfer of assets can avoid probate. When a trust is formed, all assets are transferred to the trustee of the trust (which is typically the owner/individual) for the benefit of that same owner/ individual. The key benefit of a trust is what occurs upon the death of the individual establishing the trust: the trustee’s rights and responsibilities are transferred to a new pre-determined individual and the assets of the trust are distributed (or retained for the benefit of successor beneficiaries) in whatever fashion has been laid out in the trust document. Because the assets were held by the trust and not the now-deceased individual, probate is entirely avoided.

2. Joint Ownership with Right of Survivorship

Certain assets (particularly real estate) can be held as "joint" property. In such an instance (which is very typical in marriage relationships), when one of the joint-owners dies, the property is transferred in whole automatically to the surviving owner. No probate required. However, if both joint-owners die, with no additional joint-owner, then the property becomes subject to probate.

3. Beneficiary Designations

Certain assets can be transferred by a "beneficiary designation." Such assets typically include life insurance policies, independent retirement accounts (IRAs) and employee benefit plans (401k plans, etc.). With these assets, benefits can be transferred automatically to a named beneficiary—a process that can usually be accomplished by a simple form. The intended beneficiary (typically an individual or a trust) should be named specifically. It should be noted that naming "the estate of Robert Jones" as the beneficiary will explicitly cause those proceeds to be subject to the probate process.

4. Beneficiary Form of Ownership

Similar to beneficiary designations, certain assets can be transferred to an intended beneficiary upon the death of the owner, without passing through probate. Referred to as "payable on death" or "transfer on death" designations, this can be readily accomplished with respect to securities accounts, promissory notes, bank accounts and vehicle titles. Similarly, real estate can be transferred by a "beneficiary deed" which transfers the property to the named recipient automatically upon the death of the grantor. With each of these transfer methods, probate is not required.

5. Corporate Entities

Assets owned by a corporation or an LLC are not subject to probate. Understandably, the business entity does not "die," but rather its ownership or control is transferred pursuant to the company’s operating documents. It should be noted that instruments representing company ownership interests (i.e. stock) can indeed be subject to probate and such matters should be addressed by other probate-avoidance mechanisms.

6. Life Insurance

Life insurance proceeds are typically not subject to probate administration. Naming a beneficiary of life insurance proceeds will result in the proceeds being transferred to such individual directly, completely bypassing the probate. However, naming "the estate of Robert Jones" as the beneficiary will cause the proceeds to indeed become part of the probate estate. Such practice should almost always be avoided.

7. Very Small Estates are Subject to Minimal Probate

Small estates can generally bypass the lengthy probate process. If the total assets of the decedent do not exceed $40,000, an "affidavit of small estate" is filed with the probate court, much of probate’s formality is dispensed and its administration is largely dispensed.

Summary

Probate is an entirely avoidable event. While some limited circumstances may favor probate administration, the process is typically undesirable due its time, expense and administrative requirements. Proper planning, through various methods, can remove all assets from the probate estate, allow for a smooth transfer of a decedent’s property and assure that family goals and intentions are squarely met.